Examining Risk Preferences under High Monetary Incentives: Experimental Evidence from the People's Republic of China

TLDR

The study used experimental sessions in China to elicit certainty equivalents for lotteries with real monetary outcomes, offering incentives up to three times participants’ monthly earnings within two hours. Results show that higher monetary incentives significantly alter revealed risk preferences, yet even under extreme payouts participants demanded amounts far exceeding the expected value for low‑probability gains. © 1992 American Economic Association.

Abstract

Several experimental sessions were conducted to elicit certainty equivalents for a sequence of lotteries involving real monetary outcomes. The opportunity to conduct sessions in the People's Republic of China afforded the ability to offer very large monetary incentives relative to subjects' living costs; in the highest payoff condition, subjects earned three times their normal monthly revenue in the course of a two-hour experiment. Results indicate a statistically significant impact of the level of monetary incentives on revealed risk preferences. However, even under extreme monetary incentives, subjects demanded amounts well in excess of expected value for low-probability gain prospects. Copyright 1992 by American Economic Association.